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2-1

Chapter 02

Reviewing Financial Statements

Multiple Choice Questions

1. Which financial statement reports a firm's assets, liabilities, and equity at a particular point

in time?

A. Balance Sheet

B. Income Statement.

C. Statement of Retained Earnings.

D. Statement of Cash Flows.

2. Which financial statement shows the total revenues that a firm earns and the total expenses

the firm incurs to generate those revenues over a specific period of time—generally one year?

A. Balance Sheet




3. Which financial statement reports the amounts of cash that the firm generated and

distributed during a particular time period?

A. Balance Sheet




4. Which financial statement reconciles net income earned during a given period and any cash

dividends paid within that period on one side with the change in retained earnings between the

beginning and ending of the period on the other?

A. Balance Sheet





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5. On which of the four major financial statements would you find the common stock and

paid-in surplus?

A. balance sheet

B. income statement

C. statement of cash flows

D. statement of retained earnings

6. On which of the four major financial statements would you find the increase in inventory?

A. balance sheet

B. income statement



7. On which of the four major financial statements would you find the balance of retained

earnings, December 31, 20xx?

A. balance sheet

B. income statement



8. On which of the four major financial statements would you find net plant and equipment?

A. balance sheet

B. income statement



9. For which of the following would one expect the book value of the asset to differ widely

from its market value?

A. Cash

B. Accounts Receivable

C. Inventory

D. Fixed Assests


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10. When someone is referring to the "bottom line" they are referring to

A. net income on the income statement.

B. earnings per share on the income statement.

C. dividends per share on the income statement.

D. net change in cash on the cash flow statement.

11. Common stockholders equity divided by number of shares of common stock outstanding

is the formula for calculating

A. Earnings per share (EPS)

B. Dividends per share (DPS)

C. Book Value per share (BVPS)

D. Market Value per share (MVPS)

12. This is the amount of additional taxes a firm must pay out for every additional dollar of

taxable income it earns.

A. average tax rate

B. marginal tax rate

C. progressive tax system

D. earnings before tax

13. An equity-financed firm will

A. pay more in income taxes than a debt-financed firm.

B. pay less in income taxes than a debt-financed firm.

C. pay the same in income taxes as a debt-finance firm.

D. not pay any income taxes.

14. Which of the following transactions may differ in timing of cash flow versus when

income/expenses are recorded on the income statement?

A. Sales

B. Operating Expenses

C. Fixed Asset

D. All of the above

E. Only A and B above


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15. This is cash flow available for payments to stockholders and debtholders of a firm after

the firm has made investments in assets necessary to sustain the ongoing operations of the

firm.

A. Net income available to common stockholders

B. Cash flow from Operations

C. Net cash flow

D. Free cash flow

16. Which of the following activities result in an increase in a firm's cash?

A. decrease fixed assets

B. decrease accounts payable

C. pay dividends

D. repurchase of common stock

17. These are cash inflows and outflows associated with buying and selling of fixed or other

long-term assets.

A. Cash flows from operations

B. Cash flows from investing activities

C. Cash flows from financing activities

D. Net change in cash and cash equivalents

18. If a company reports a large amount of net income on its income statement during a year,

the firm will have

A. positive cash flow.

B. negative cash flow.

C. zero cash flow.

D. any of the above scenarios are possible.


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19. Free cash flow is defined as

A. Cash flows available for payments to stockholders of a firm after the firm has made

payments to all others will claims against it.

B. Cash flows available for payments to stockholders and debtholders of a firm after the firm

has made payments necessary to vendors.

C. Cash flows available for payments to stockholders and debtholders of a firm after the firm

has made investments in assets necessary to sustain the ongoing operations of the firm.

D. Cash flows available for payments to stockholders and debtholders of a firm that would be

tax free to the recipients.

20. This is the process of controlling a firm's earnings.

A. Generally Accepted Accounting Principles

B. The matching principle

C. Earnings management

D. Accrual basis accounting

21. The Sarbanes-Oxley Act requires public companies to ensure that these individuals have

considerable experience applying generally accepted accounting principles (GAAP) for

financial statements.

A. External auditors

B. Internal auditors

C. Chief Financial Officers

D. Corporate boards' audit committees

22. Balance Sheet You are evaluating the balance sheet for Cypress Corporation. From the

balance sheet you find the following balances: Cash and marketable securities = $600,000,

Accounts receivable = $800,000, Inventory = $500,000, Accrued wages and taxes = $50,000,

Accounts payable = $200,000, and Notes payable = $1,000,000. What is Cypress's net

working capital?

A. $152,000

B. $650,000

C. $1,900,000

D. $3,150,000


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23. Balance Sheet You are evaluating the balance sheet for Campus Corporation. From the



Accounts payable = $300,000, and Notes payable = $600,000. What is Campus's net working

capital?

A. $-210,000

B. $700,000

C. $910,000

D. $1,610,000

24. Balance Sheet Jack and Jill Corporation's year-end 2009 balance sheet lists current assets

of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of

$300,000. What is Jack and Jill's total stockholders' equity?

A. $495,000

B. $555,000

C. $1,050,000

D. There is not enough information to calculate total stockholder's equity.

25. Balance Sheet Nicole Corporation's year-end 2009 balance sheet lists current assets of

$750,000, fixed assets of $600,000, current liabilities of $545,000, and long-term debt of

$700,000. What is Nicole's total stockholders' equity?

A. $105,000

B. $1,245,000

C. $1,350,000


26. Income Statement Bullseye, Inc.'s 2008 income statement lists the following income and

expenses: EBIT = $900,000, Interest expense = $85,000, and Net income = $570,000. What is

the 2008 Taxes reported on the income statement?

A. $245,000

B. $330,000

C. $815,000

D. There is not enough information to calculate 2008 Taxes.


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27. Income Statement Barnyard, Inc.'s 2008 income statement lists the following income and



A. $135,000

B. $450,000

C. $495,000



expenses: EBIT = $500,000, Interest expense = $45,000, and Taxes = $152,000. Barnyard's

has no preferred stock outstanding and 200,000 shares of common stock outstanding. What

are its the 2008 earnings per share?

A. $2.50

B. $2.275

C. $1.74

D. $1.515


expenses: EBIT = $700,000, Interest expense = $50,000, and Taxes = $217,000. Bullseye's


are the 2008 earnings per share?

A. $2.333

B. $2.167

C. $1.61

D. $1.443


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30. Corporate Taxes Eccentricity, Inc. had $300,000 in 2008 taxable income. Using the tax

schedule from Table 2-3, what is the company's 2008 income taxes, average tax rate, and

marginal tax rate, respectively?

A. $22,250, 7.4167%, 39%

B. $78,000, 26%, 39%

C. $100,250, 33.4167%, 39%

D. $139,250, 46.4167%, 39%

31. Corporate Taxes Swimmy, Inc. had $400,000 in 2008 taxable income. Using the tax



A. $22,100, 5.525%, 34%

B. $113,900, 28.475%, 34%

C. $136,000, 34%, 34%

D. $136,000, 39%, 34%

32. Corporate Taxes Scuba, Inc. is concerned about the taxes paid by the company in 2008.

In addition to $5 million of taxable income, the firm received $80,000 of interest on state-

issued bonds and $500,000 of dividends on common stock it owns in Boating Adventures,

Inc. What is Scuba's tax liability, average tax rate, and marginal tax rate, respectively?

A. $1,637,100, 31.788%, 34%

B. $1,751,000, 34%, 34%

C. $1,870,000, 34%, 34%

D. $1,983,900, 36.07%, 34%


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33. Corporate Taxes Landscaping, Inc. is concerned about the taxes paid by the company in

2008. In addition to $250,000 of taxable income, the firm received $1,000 of interest on state-

issued bonds and $6,000 of dividends on common stock it owns in Sprinklers, Inc. What is

Landscaping's tax liability, average tax rate, and marginal tax rate, respectively?

A. $59,202, 23.51%, 39%

B. $81,452, 32.3479%, 39%

C. $83,480, 32.48%, 39%

D. $98,202, 39%, 39%

34. Statement of Cash Flows Paige's Properties Inc. reported 2008 net income of $5 million

and depreciation of $1,500,000. The top part Paige's Properties, Inc.'s 2007 and 2008 balance

sheets is listed below (in millions of dollars).

What is the 2008 net cash flow from operating activities for Paige's Properties, Inc.?

A. $-13,500,000

B. $1,500,000

C. $5,000,000

D. $6,500,000


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35. Statement of Cash Flows Ann's Flowers Inc. reported 2008 net income of $1 million and

depreciation of $250,000. The top part Ann's Flowers, Inc.'s 2007 and 2008 balance sheets is

listed below (in millions of dollars).

What is the 2008 net cash flow from operating activities for Ann's Flower's, Inc.?

A. $-1,000,000

B. $1,000,000

C. $1,250,000

D. $2,250,000

36. Statement of Cash Flows In 2008, Upper Crust had cash flows from investing activities

of -$250,000 and cash flows from financing activities of -$150,000. The balance in the firm's

cash account was $90,000 at the beginning of 2008 and $105,000 at the end of the year. What

was Upper Crust's cash flow from operations for 2008?

A. $15,000

B. $105,000

C. $400,000

D. $415,000

37. Statement of Cash Flows In 2008, Lower Case Productions had cash flows from

investing activities of +$50,000 and cash flows from financing activities of +$100,000. The

balance in the firm's cash account was $80,000 at the beginning of 2008 and $65,000 at the

end of the year. What was Lower Case's cash flow from operations for 2008?

A. $-15,000

B. $-150,000

C. $-165,000

D. $65,000


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38. Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to

evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned

an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense was $8 million.

Crew Cut's gross fixed assets increased by $10 million from 2007 to 2008. The firm's current

assets increased by $6 million and spontaneous current liabilities increased by $4 million.

What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for

2008, respectively in millions?

A. $23, $10, $13

B. $23, $12, $11

C. $27, $10, $17

D. $27, $12, $15

39. Free Cash Flow You are considering an investment in Cruise, Inc. and want to evaluate

the firm's free cash flow. From the income statement, you see that Cruise earned an EBIT of

$202 million, paid taxes of $51 million, and its depreciation expense was $75 million.

Cruise's gross fixed assets increased by $70 million from 2007 to 2008. The firm's current

assets decreased by $10 million and spontaneous current liabilities increased by $6 million.

What is Cruise's operating cash flow, investment in operating capital and free cash flow for


A. $202, $70, $130

B. $226, $70, $156

C. $226, $54, $172

D. $226, $74, $152

40. Free Cash Flow Catering Corp. reported free cash flows for 2008 of $8 million and

investment in operating capital of $2 million. Catering listed $1 million in depreciation

expense and $2 million in taxes on its 2008 income statement. What was Catering's 2008

EBIT?

A. $7 million

B. $10 million

C. $11 million

D. $13 million


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41. Free Cash Flow Iron Ore Corp. reported free cash flows for 2008 of $90 million and

investment in operating capital of $200 million. Iron Ore listed $50 million in depreciation

expense and $40 million in taxes on its 2008 income statement. What was Iron Ore's 2008

EBIT?

A. $140 million

B. $280 million

C. $290 million

D. $380 million

42. Statement of Retained Earnings TriCycle, Corp. began the year 2008 with $25 million

in retained earnings. The firm earned net income of $7 million in 2008 and paid $1 million to

its preferred stockholders and $3 million to its common stockholders. What is the year-end

2008 balance in retained earnings for TriCycle?

A. $25 million

B. $28 million

C. $32 million

D. $36 million

43. Statement of Retained Earnings Triplette, Corp. began the year 2008 with $-5 million in

retained earnings. The firm earned net income of $10 million in 2008 and paid $2 million to


2008 balance in retained earnings for Triplette?

A. $2 million

B. $5 million

C. $8 million

D. $18 million

44. Statement of Retained Earnings Night Scapes, Corp. began the year 2008 with $10

million in retained earnings. The firm suffered a net loss of $2 million in 2008 and yet paid $2

million to its preferred stockholders and $1 million to its common stockholders. What is the

year-end 2008 balance in retained earnings for Night Scapes?

A. $5 million

B. $8 million

C. $9 million

D. $15 million


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45. Statement of Retained Earnings Z, Corp. began the year 2008 with $1 million in

retained earnings. The firm earned net income of $5 million in 2008 and paid $3 million to its

common stockholders. What is the year-end 2008 balance in retained earnings for Z?

A. $1 million

B. $3 million

C. $6 million

D. $9 million

46. Statement of Retained Earnings Use the following information to find dividends paid to

common stockholders during 2008.

A. $3 million

B. $4 million

C. $10 million

D. $17 million


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A. $20 million

B. $25 million

C. $70 million

D. $90 million

48. Balance Sheet Harvey's Hamburger Stand has total assets of $3 million of which $1

million are current assets. Cash makes up 20 percent of the current assets and accounts

receivable makes up another 5 percent of current assets. Harvey's gross plant and equipment

has a book value of $1.5 million and other long-term assets have a book value of $1 million.

Using this information, what is the balance of inventory and the balance of depreciation on

Harvey's Hamburger Stand's balance sheet?

A. $250,000, $500,000

B. $250,000, $1 million

C. $750,000, $500,000

D. $750,000, $1 million

49. Balance Sheet Run4It has total assets of $20 million of which $10 million are current

assets. Cash makes up 5 percent of the current assets and accounts receivable makes up

another 50 percent of current assets. Run4It's gross plant and equipment has a book value of

$15 million and other long-term assets have a book value of $2 million. Using this

information, what is the balance of inventory and the balance of depreciation on Run4It's

balance sheet?

A. $5.5 million, $7 million

B. $5.5 million, $8 million

C. $4.5 million, $7 million

D. $4.5 million, $8 million


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50. Balance Sheet School Books, Inc. has total assets of $18 million of which $6 million are

current assets. Cash makes up 10 percent of the current assets and accounts receivable makes

up another 40 percent of current assets. School Book's gross plant and equipment has a book

value of $13 million and other long-term assets have a book value of $2 million. Using this


balance sheet?

A. $3 million, $2 million

B. $3 million, $3 million



51. Balance Sheet Universe It Ts has total assets of $250,000 of which $100,000 are current


another 65 percent of current assets. Ts's gross plant and equipment has a book value of

$200,000 and other long-term assets have a book value of $40,000. Using this information,

what is the balance of inventory and the balance of depreciation on Ts's balance sheet?

A. $20,000, $90,000

B. $20,000, $110,000

C. $100,000, $90,000

D. $100,000, $110,000

52. Balance Sheet Ted's Taco Shop has total assets of $5 million. Forty percent of these

assets are financed with debt of which $400,000 is current liabilities. The firm has no

preferred stock but the balance in common stock and paid-in surplus is $1 million. Using this

information what is the balance for long-term debt and retained earnings on Ted's Taco Shop's

balance sheet?

A. $400,000, $1 million



D. $2 million, $3 million


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53. Balance Sheet Purse's Galour has total assets of $2 million. Thirty percent of these assets

are financed with debt of which $200,000 is current liabilities. The firm has no preferred stock

but the balance in common stock and paid-in surplus is $800,000. Using this information what

is the balance for long-term debt and retained earnings on Galour's balance sheet?

A. $400,000, $600,000

B. $400,000, $800,000

C. $600,000, $600,000

D. $600,000, $800,000

54. Balance Sheet Hair Etc. has total assets of $15 million. Twenty percent of these assets are

financed with debt of which $1 million is current liabilities. The firm has no preferred stock

but the balance in common stock and paid-in surplus is $8 million. Using this information

what is the balance for long-term debt and retained earnings on Hair Etc's balance sheet?



C. $2 million, $8 million


55. Balance Sheet Storage N More has total assets of $25 million. Sixty percent of these

assets are financed with debt of which $5 million is current liabilities. The firm has no


information what is the balance for long-term debt and retained earnings on More's balance

sheet?






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56. Market Value versus Book Value Acme Bricks balance sheet lists net fixed assets as

$40 million. The fixed assets could currently be sold for $50 million. Acme's current balance

sheet shows current liabilities of $15 million and net working capital of $12 million. If all the

current accounts were liquidated today, the company would receive $77 million cash after

paying $15 million in liabilities. What is the book value of Acme's assets today? What is the

market value of these assets?





57. Market Value versus Book Value Diva Nails balance sheet lists net fixed assets as $4

million. The fixed assets could currently be sold for $5 million. Diva's current balance sheet

shows current liabilities of $1 million and net working capital of $400,000. If all the current

accounts were liquidated today, the company would receive $5 million cash after paying $1

million in liabilities. What is the book value of Diva's assets today? What is the market value

of these assets?


B. $1.4 million, $5.4 million



58. Market Value versus Book Value Glo's Glasses balance sheet lists net fixed assets as

$20 million. The fixed assets could currently be sold for $25 million. Glo's current balance



paying $7 million in liabilities. What is the book value of Glo's assets today? What is the







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59. Market Value versus Book Value Rupert's Rims balance sheet lists net fixed assets as

$15 million. The fixed assets could currently be sold for $17 million. Rupert's current balance



paying $5 million in liabilities. What is the book value of Rupert's assets today? What is the






60. Debt versus Equity Financing You are considering a stock investment in one of two

firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have

identical operating income of $600,000. AllDebt, Inc. finances its $1.2 million in assets with

$1 million in debt (on which it pays 10 percent interest annually) and $.2 million in equity.

AllEquity, Inc. finances its $1.2 million in assets with no debt and $1.2 million in equity.

Both firms pay a tax rate of 30 percent on their taxable income. What are the asset funders'

(the debtholders and stockholders) resulting return on assets for the two firms?

A. 29.17%, and 35%, respectively

B. 37.5%, and 35%, respectively

C. 37.5%, and 37.5%, respectively

D. 50%, and 50%, respectively



identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with

$5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity.

AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both

firms pay a tax rate of 40 percent on their taxable income. What are the asset funders' (the

debtholders and stockholders) resulting return on assets for the two firms?



C. 33%, and 30%, respectively



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A. 29.17%, and 35%,respectively


C. 41.66%, and 50%, respectively




identical operating income of $400,000. AllDebt, Inc. finances its $800,000 in assets with

$600,000 in debt (on which it pays 5 percent interest annually) and $200,000 in equity.

AllEquity, Inc. finances its $800,000 in assets with no debt and $800,000 in equity. Both



A. 32.375%, and 35.00%,respectively

B. 36.125%, and 35.00%, respectively



64. Income Statement You have been given the following information for Fina's Furniture

Corp.:

net sales = $25,500,000

cost of goods sold = $10,250,000;

addition to retained earnings = $305,000;

dividends paid to preferred and common stockholders = $500,000;

interest expense = $2,000,000.

The firm's tax rate is 30 percent. What is the depreciation expense for Fina's Furniture Corp?

A. $12,100,000

B. $12,400,000

C. $14,100,000

D. $14,400,000


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65. Income Statement You have been given the following information for Romeo's Rockers

Corp.:

net sales = $5,200,000


addition to retained earnings = $1,000,000;


interest expense = $200,000.

The firm's tax rate is 30 percent. What is the depreciation expense for Romeo's Rockers

Corp?

A. $900,000

B. $1,100,000

C. $1,500,000

D. $1,600,000

66. Income Statement You have been given the following information for Paige's Purses

Corp.:

net sales = $10,750,000



dividends paid to preferred and common stockholders = $2,000,000;


The firm's tax rate is 40 percent. What is the depreciation expense for Paige's Purses Corp?

A. $950,000

B. $1,200,000

C. $1,450,000

D. $3,220,000


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67. Income Statement You have been given the following information for Nicole's Neckties

Corp.:

net sales = $2,500,000





The firm's tax rate is 40 percent. What is the depreciation expense for Nicole's Neckties

Corp?

A. $550,000

B. $600,000

C. $650,000

D. $820,000

68. Income Statement You have been given the following information for Sherry's Sandwich

Corp.:

net sales = $300,000;

gross profit = $100,000;



depreciation expense = $25,000.

The firm's tax rate is 30 percent. What are the cost of goods sold and the interest expense for

Sherry's Sandwich Corp?

A. $20,000, and $200,000, respectively

B. $100,000, and $20,000, respectively

C. $200,000, and $20,000, respectively

D. $200,000, and $36,500, respectively


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69. Income Statement You have been given the following information for Kaye's Krumpet

Corp.:

net sales = $150,000;






Kaye's Krumpet Corp?





70. Income Statement You have been given the following information for Amy's Armchairs

Corp.:

net sales = $1,500,000;

gross profit = $1,000,000;





Amy's Armchair Corp?






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71. Income Statement You have been given the following information for Ross's Rocket

Corp.:

net sales = $1,000,000;






Ross's Rocket Corp?





72. Corporate Taxes The Carolina Corporation had a 2008 taxable income of $3,000,000

from operations after all operating costs but before

1) interest charges of $500,000,

2) dividends received of $75,000,

3) dividends paid of $1,000,000, and

4) income taxes.

Using the tax schedule in Table 2.3, what is Carolina's income tax liability?

What are Carolina's average and marginal tax rates on taxable income from operations?

A. $857,650, 28.5883%, 34%, respectively

B. $875,500, 29.1833%, 34%, respectively

C. $875,500, 34%, 34%, respectively

D. $1,020,000, 34%, 34%, respectively


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73. Corporate Taxes The Ohio Corporation had a 2008 taxable income of $50,000,000 from

operations after all operating costs but before




4) income taxes.

Using the tax schedule in Table 2.3, what is Ohio's income tax liability?

What are Ohio's average and marginal tax rates on taxable income from operations?

A. $6,416,667, 12.8333%, 35%, respectively

B. $13,829,725.45, 27.6595%, 35%, respectively

C. $17,329,725.45, 34.6595%, 35%, respectively

D. $17,340,750.45, 34.6815%, 35%, respectively

74. Corporate Taxes The Sasnak Corporation had a 2008 taxable income of $4,450,000 from




3) dividends paid of $500,000, and

4) income taxes.

Using the tax schedule in Table 2.3, what is Sasnak's income tax liability?

What are Sasnak's average and marginal tax rates on taxable income from operations?

A. $1,349,800, 30,3326%, 34%, respectively

B. $1,349,800, 34%, 34%, respectively

C. $1,564,000, 34%, 34%, respectively

D. $1,564,000, 35,1461%, 34%, respectively

75. Corporate Taxes The AOK Corporation had a 2008 taxable income of $2,200,000 from





4) income taxes.

Using the tax schedule in Table 2.3, what is AOK's income tax liability?

What are AOK's average and marginal tax rates on taxable income from operations?

A. $793,900, 34%, 34%, respectively

B. $793,900, 36.0864%, 34%, respectively

C. $972,400, 34%, 34%, respectively

D. $972,400, 44.2%, 34%, respectively


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76. Corporate Taxes Suppose that in addition to the $5.5 million of taxable income from

operations, Emily's Flowers, Inc. received $500,000 of interest on state-issued bonds and

$300,000 of dividends on common stock it owns in Amy's Iris Bulbs, Inc.

Using the tax schedule in Table 2.3 what is Emily's Flowers' income tax liability.

What are Emily's Flowers' average and marginal tax rates on total taxable income?

A. $1,900,600, 34%, 34%, respectively

B. $1,972,000, 34%, 34%, respectively

C. $2,070,600, 34%, 34%, respectively

D. $2,142,000, 34%, 34%, respectively

77. Corporate Taxes Suppose that in addition to the $10 million of taxable income from

operations, Jack's Hills, Inc. received $200,000 of interest on state-issued bonds and $600,000

of dividends on common stock it owns in Jill's Pales, Inc.

Using the tax schedule in Table 2.3 what is Jack's income tax liability.

What are Jack's average and marginal tax rates on total taxable income?

A. $3,400,000, 35%, 35%, respectively

B. $3,463,000, 34.0177%, 35%, respectively

C. $3,563,000, 35%, 35%, respectively

D. $3,680,000, 34.0741%, 35%, respectively

78. Corporate Taxes Suppose that in addition to the $300,000 of taxable income from

operations, Liam's Burgers, Inc. received $25,000 of interest on state-issued bonds and

$50,000 of dividends on common stock it owns in Sodas, Inc.

Using the tax schedule in Table 2.3 what is Liam's income tax liability.

What are Liam's average and marginal tax rates on total taxable income?

A. $106,100, 33.6825%, 39%, respectively

B. $122,850, 39%, 39%, respectively

C. $129,500, 34.5333%, 39%, respectively

D. $139,250, 37.1333%, 359%, respectively


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operations, Tan Lines, Inc. received $7,000 of interest on state-issued bonds and $30,000 of

dividends on common stock it owns in Sun Lotions, Inc.

Using the tax schedule in Table 2.3 what is Tan Lines' income tax liability.

What are Tan Lines' average and marginal tax rates on total taxable income?

A. $80,750, 32.3%, 39%, respectively

B. $84,260, 32.5328%, 39%, respectively

C. $95,180, 33.1638%, 39%, respectively

D. $105,260, 37.5929%, 359%, respectively

80. Statement of Cash Flows Fina's Faucets, Inc. has net cash flows from operating activities

for the last year of $17 million. The income statement shows that net income is $15 million

and depreciation expense is $6 million. During the year, the change in inventory on the

balance sheet was an increase of $4 million, change in accrued wages and taxes was an

increase of $1 million and change in accounts payable was an increase of $1 million. At the

beginning of the year the balance of accounts receivable was $5 million. What was the end of

year balance for accounts receivable?

A. $2 million

B. $3 million

C. $7 million

D. $9 million

81. Statement of Cash Flows Zoe's Dog Biscuits, Inc. has net cash flows from operating

activities for the last year of $226 million. The income statement shows that net income is

$150 million and depreciation expense is $85 million. During the year, the change in

inventory on the balance sheet was an increase of $14 million, change in accrued wages and

taxes was an increase of $15 million and change in accounts payable was an increase of $10

million. At the beginning of the year the balance of accounts receivable was $45 million.

What was the end of year balance for accounts receivable?

A. $20 million

B. $25 million

C. $45 million

D. $65 million


2-27

82. Statement of Cash Flows Cloe's Costumes, Inc. has net cash flows from operating



inventory on the balance sheet was a decrease of $14 million, change in accrued wages and

taxes was a decrease of $15 million and change in accounts payable was a decrease of $10



A. $20 million

B. $25 million

C. $45 million

D. $65 million

83. Statement of Cash Flows Nickolas's Nut Farms, Inc. has net cash flows from operating

activities for the last year of $25 million. The income statement shows that net income is $15

million and depreciation expense is $6 million. During the year, the change in inventory on

the balance sheet was a decrease of $4 million, change in accrued wages and taxes was a

decrease of $1 million and change in accounts payable was a decrease of $1 million. At the



A. $2 million

B. $3 million

C. $7 million

D. $9 million

84. Statement of Cash Flows Crispy Corporation has net cash flow from financing activities

for the last year of $20 million. The company paid $5 million in dividends last year. During

the year, the change in notes payable on the balance sheet was an increase of $2 million, and

change in common and preferred stock was an increase of $3 million. The end of year balance

for long-term debt was $45 million. What was their beginning of year balance for long-term

debt?

A. $15 million

B. $20 million

C. $25 million

D. $35 million


2-28

85. Statement of Cash Flows Full Moon Productions Inc. has net cash flow from financing

activities for the last year of $105 million. The company paid $15 million in dividends last

year. During the year, the change in notes payable on the balance sheet was an increase of $40

million, and change in common and preferred stock was an increase of $50 million. The end

of year balance for long-term debt was $50 million. What was their beginning of year balance

for long-term debt?

A. $5 million

B. $20 million

C. $30 million

D. $35 million

86. Statement of Cash Flows Crax Corporation has net cash flow from financing activities


the year, the change in notes payable on the balance sheet was a decrease of $2 million, and



debt?

A. $16 million

B. $20 million

C. $21 million

D. $45 million

87. Statement of Cash Flows Café Creations Inc. has net cash flow from financing activities



change in common and preferred stock was an increase of $50 million. The end of year

balance for long-term debt was $40 million. What was their beginning of year balance for

long-term debt?

A. $10 million

B. $20 million

C. $30 million

D. $40 million


2-29

88. Free Cash Flow The 2008 income statement for Pete's Pumpkins shows that depreciation

expense is $250 million, EBIT is $500 million, EBT is $320 million, and the tax rate is 30

percent. At the beginning of the year, the balance of gross fixed assets was $1,600 million and

net operating working capital was $640 million. At the end of the year gross fixed assets was

$2,000 million. Pete's free cash flow for the year was $630 million. What is their end of year

balance for net operating working capital?

A. $24 million

B. $264 million

C. $654 million

D. $1,064 million

89. Free Cash Flow The 2008 income statement for Lou's Shoes shows that depreciation

expense is $2 million, EBIT is $5 million, EBT is $3 million, and the tax rate is 40 percent. At

the beginning of the year, the balance of gross fixed assets was $16 million and net operating

working capital was $6 million. At the end of the year gross fixed assets was $20 million.

Lou's free cash flow for the year was $4 million. What is their end of year balance for net

operating working capital?

A. $1.8 million

B. $3.8 million

C. $5.8 million

D. $12.2 million

90. Free Cash Flow The 2008 income statement for Paige's Purses shows that depreciation


percent. At the beginning of the year, the balance of gross fixed assets was $80 million and


$100 million. Paige's free cash flow for the year was $20 million. What is their end of year


A. $10.5 million

B. $14 million

C. $20.5 million

D. $30.5 million


2-30

91. Free Cash Flow The 2008 income statement for Louis Lumberyard shows that

depreciation expense is $500 million, EBIT is $1,000 million, EBT is $600 million, and the

tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was

$2,000 million and net operating working capital was $1,500 million. At the end of the year

gross fixed assets was $4,000 million. Louis's free cash flow for the year was $1,240 million.

What is their end of year balance for net operating working capital?

A. $-420 million

B. $80 million

C. $420 million

D. $1,320 million

92. Free Cash Flow The 2008 income statement for Betty's Barstools shows that depreciation

expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the

year, the balance of gross fixed assets was $510 million. The change in net operating working

capital during the year was $94 million. Betty's free cash flow for the year was $625 million.

What was the beginning of year balance for gross fixed assets?

A. $359 million

B. $380 million

C. $849 million

D. $1,094 million

93. Free Cash Flow The 2008 income statement for John's Gym shows that depreciation

expense is $20 million, EBIT is $80 million, and taxes are $24 million. At the end of the year,

the balance of gross fixed assets was $102 million. The change in net operating working

capital during the year was $18 million. John's free cash flow for the year was $41 million.


A. $43 million

B. $77 million

C. $84 million

D. $163 million


2-31

94. Statement of Retained Earnings Bike and Hike, Inc. started the year with a balance of

retained earnings of $100 million and ended the year with retained earnings of $128 million.

The company paid dividends of $9 million to the preferred stock holders and $22 million to

common stock holders. What was Bike and Hike's net income for the year?

A. $28 million

B. $31 million

C. $59 million

D. $128 million

95. Statement of Retained Earnings Soccer Starz, Inc. started the year with a balance of

retained earnings of $25 million and ended the year with retained earnings of $32 million. The

company paid dividends of $2 million to the preferred stock holders and $6 million to

common stock holders. What was Soccer Starz's net income for the year?

A. $7 million

B. $15 million

C. $40 million

D. $49 million

96. Statement of Retained Earnings Jamaican Ice Cream Corp. started the year with a

balance of retained earnings of $100 million. The company reported net income for the year

of $45 million, paid dividends of $2 million to the preferred stock holders and $15 million to

common stock holders. What is Jamaican Ice Cream's end of year balance in retained

earnings?

A. $38 million

B. $55 million

C. $128 million

D. $162 million

97. Statement of Retained Earnings Water Adventures Corp. started the year with a balance

of retained earnings of $50 million. The company reported net income for the year of $12

million, paid dividends of $1 million to the preferred stock holders and $30 million to

common stock holders. What is Water Adventure's end of year balance in retained earnings?

A. $19 million

B. $31 million

C. $43 million

D. $62 million


2-32

98. Income Statement Listed below is the 2008 income statement for Lamps, Inc.

The CEO of Lamp's wants the company to earn a net income of $12 million in 2009. Cost of

goods sold is expected to be 75 percent of net sales, depreciation expense is not expected to

change, interest expense is expected to increase to $4 million, and the firms tax rate will be 40

percent. What is the net sales needed to produce net income of $12 million?

A. $29 million

B. $112 million

C. $116 million

D. $124 million


2-33

99. Income Statement You have been given the following information for Halle's Holiday

Store Corp. for the year 2008:

net sales = $50,000,000;





The firm's tax rate is 30 percent.

In 2009, net sales are expected to increase by $5.5 million,

cost of goods sold is expected to be 65 percent of net sales,

expensed depreciation is expected to be the same as in 2008,

interest expense is expected to be $2,500,000,

the tax rate is expected to be 30 percent of EBT, and dividends paid to preferred and common

stockholders will not change.

What is the addition to retained earnings expected in 2009?

A. $2,000,000

B. $5,447,500

C. $8,447,500

D. $10,304,643

100. Free Cash Flow Martha's Moving Van 4U, Inc. had free cash flow during 2008 of $1

million, EBIT of $30 million, tax expense of $8 million, and depreciation of $4 million. Using

this information, what was Martha's Accounts Payable ending balance in 2008?

A. $5 million

B. $15 million

C. $35 million

D. $45 million

101. Free Cash Flow Windy City Designs had free cash flow during 2008 of $1 million. The

change in gross fixed assets on Windy's balance sheet during 2008 was $25 million and the

change in net operating working capital was $37 million. Using this information, what will

Windy's taxes be?

A. $20 million

B. $25 million

C. $32 million

D. $36 million


2-34

Essay Questions

102. LG 5 2-21 Statement of Cash Flows Use the balance sheet and income statement below

to construct a statement of cash flows for Betty's Bakery Corp.


2-35


2-36

103. Statement of Cash Flows Use the balance sheet and income statement below to

construct a statement of cash flows for Val's Vegetable Corp.


2-37

104. When might earnings management become an ethical consideration?


2-38

105. How do taxes influence how corporate managers' and investors' structure transactions

and capitalize their companies?

106. How would you explain to a friend why market value of a firm is more important to an

investor than book value of the firm?

Chapter 02 Reviewing Financial Statements Answer Key

Multiple Choice Questions

1. Which financial statement reports a firm's assets, liabilities, and equity at a particular point

in time?

A. Balance Sheet




AACSB: Reflective Thinking Bloom's: Knowledge and understanding

Difficulty: Basic

Learning Objective: 1


2-39

2. Which financial statement shows the total revenues that a firm earns and the total expenses

the firm incurs to generate those revenues over a specific period of time—generally one year?

A. Balance Sheet




AACSB: Reflective Thinking

Bloom's: Knowledge and understanding Difficulty: Basic


3. Which financial statement reports the amounts of cash that the firm generated and

distributed during a particular time period?

A. Balance Sheet





Difficulty: Basic


4. Which financial statement reconciles net income earned during a given period and any cash

dividends paid within that period on one side with the change in retained earnings between the

beginning and ending of the period on the other?

A. Balance Sheet





Bloom's: Knowledge and understanding

Difficulty: Basic Learning Objective: 1


2-40

5. On which of the four major financial statements would you find the common stock and

paid-in surplus?

A. balance sheet

B. income statement






6. On which of the four major financial statements would you find the increase in inventory?

A. balance sheet

B. income statement




Difficulty: Basic


7. On which of the four major financial statements would you find the balance of retained

earnings, December 31, 20xx?

A. balance sheet

B. income statement







2-41

8. On which of the four major financial statements would you find net plant and equipment?

A. balance sheet

B. income statement






9. For which of the following would one expect the book value of the asset to differ widely

from its market value?

A. Cash

B. Accounts Receivable

C. Inventory

D. Fixed Assests


Difficulty: Basic


10. When someone is referring to the "bottom line" they are referring to

A. net income on the income statement.

B. earnings per share on the income statement.

C. dividends per share on the income statement.

D. net change in cash on the cash flow statement.



Difficulty: Basic



2-42

11. Common stockholders equity divided by number of shares of common stock outstanding

is the formula for calculating

A. Earnings per share (EPS)

B. Dividends per share (DPS)

C. Book Value per share (BVPS)

D. Market Value per share (MVPS)




12. This is the amount of additional taxes a firm must pay out for every additional dollar of

taxable income it earns.

A. average tax rate

B. marginal tax rate

C. progressive tax system

D. earnings before tax


Difficulty: Basic


13. An equity-financed firm will

A. pay more in income taxes than a debt-financed firm.

B. pay less in income taxes than a debt-financed firm.

C. pay the same in income taxes as a debt-finance firm.

D. not pay any income taxes.



Difficulty: Intermediate Learning Objective: 3


2-43

14. Which of the following transactions may differ in timing of cash flow versus when

income/expenses are recorded on the income statement?

A. Sales

B. Operating Expenses

C. Fixed Asset

D. All of the above

E. Only A and B above



Difficulty: Basic


15. This is cash flow available for payments to stockholders and debtholders of a firm after

the firm has made investments in assets necessary to sustain the ongoing operations of the

firm.

A. Net income available to common stockholders

B. Cash flow from Operations

C. Net cash flow

D. Free cash flow


Difficulty: Basic


16. Which of the following activities result in an increase in a firm's cash?

A. decrease fixed assets

B. decrease accounts payable

C. pay dividends

D. repurchase of common stock





2-44

17. These are cash inflows and outflows associated with buying and selling of fixed or other

long-term assets.

A. Cash flows from operations

B. Cash flows from investing activities

C. Cash flows from financing activities

D. Net change in cash and cash equivalents




18. If a company reports a large amount of net income on its income statement during a year,

the firm will have

A. positive cash flow.

B. negative cash flow.

C. zero cash flow.

D. any of the above scenarios are possible.


Difficulty: Intermediate


19. Free cash flow is defined as

A. Cash flows available for payments to stockholders of a firm after the firm has made

payments to all others will claims against it.

B. Cash flows available for payments to stockholders and debtholders of a firm after the firm

has made payments necessary to vendors.

C. Cash flows available for payments to stockholders and debtholders of a firm after the firm

has made investments in assets necessary to sustain the ongoing operations of the firm.

D. Cash flows available for payments to stockholders and debtholders of a firm that would be

tax free to the recipients.


Bloom's: Knowledge and understanding Difficulty: Intermediate



2-45

20. This is the process of controlling a firm's earnings.

A. Generally Accepted Accounting Principles

B. The matching principle

C. Earnings management

D. Accrual basis accounting




21. The Sarbanes-Oxley Act requires public companies to ensure that these individuals have

considerable experience applying generally accepted accounting principles (GAAP) for

financial statements.

A. External auditors

B. Internal auditors

C. Chief Financial Officers

D. Corporate boards' audit committees





2-46

22. Balance Sheet You are evaluating the balance sheet for Cypress Corporation. From the



Accounts payable = $200,000, and Notes payable = $1,000,000. What is Cypress's net

working capital?

A. $152,000

B. $650,000

C. $1,900,000

D. $3,150,000

So the firm's net working capital was $650,000 ($1,900,000 - $1,250,000).

AACSB: Analytical

Bloom's: Application & analysis



2-47

23. Balance Sheet You are evaluating the balance sheet for Campus Corporation. From the



Accounts payable = $300,000, and Notes payable = $600,000. What is Campus's net working

capital?

A. $-210,000

B. $700,000

C. $910,000

D. $1,610,000

So the firm's net working capital was $-210,000 ($700,000 - $910,000).

AACSB: Analytical




2-48

24. Balance Sheet Jack and Jill Corporation's year-end 2009 balance sheet lists current assets

of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of

$300,000. What is Jack and Jill's total stockholders' equity?

A. $495,000

B. $555,000

C. $1,050,000


Recall the balance sheet identity in Equation 2-1: Assets = Liabilities + Equity. Rearranging

this equation: Equity = Assets - Liabilities. Thus, the balance sheets would appear as follows:

AACSB: Analytical Bloom's: Application & analysis

Difficulty: Basic



2-49

25. Balance Sheet Nicole Corporation's year-end 2009 balance sheet lists current assets of

$750,000, fixed assets of $600,000, current liabilities of $545,000, and long-term debt of

$700,000. What is Nicole's total stockholders' equity?

A. $105,000

B. $1,245,000

C. $1,350,000


Recall the balance sheet identity in Equation 2-1: Assets = Liabilities + Equity. Rearranging

this equation: Equity = Assets - Liabilities. Thus, the balance sheets would appear as follows:

AACSB: Analytical

Bloom's: Application & analysis Difficulty: Basic





A. $245,000

B. $330,000

C. $815,000


Using the setup of an Income Statement in Table 2.2:


Difficulty: Basic



2-50




A. $135,000

B. $450,000

C. $495,000



AACSB: Analytical




2-51


expenses: EBIT = $500,000, Interest expense = $45,000, and Taxes = $152,000. Barnyard's


are its the 2008 earnings per share?

A. $2.50

B. $2.275

C. $1.74

D. $1.515


Thus,


Difficulty: Basic



2-52


expenses: EBIT = $700,000, Interest expense = $50,000, and Taxes = $217,000. Bullseye's


are the 2008 earnings per share?

A. $2.333

B. $2.167

C. $1.61

D. $1.443


Thus,

AACSB: Analytical




2-53

30. Corporate Taxes Eccentricity, Inc. had $300,000 in 2008 taxable income. Using the tax



A. $22,250, 7.4167%, 39%

B. $78,000, 26%, 39%

C. $100,250, 33.4167%, 39%

D. $139,250, 46.4167%, 39%

From Table 2.3, the $300,000 of taxable income puts Eccentricity in the 39 percent marginal

tax bracket. Thus,

Note that the base amount is the maximum dollar value listed in the previous tax bracket. The

average tax rate for Eccentricity Inc. comes to:

If Eccentricity earned $1 more of taxable income, it would pay 39 cents (its tax rate of 39

percent) more in taxes. Thus, the firm's marginal tax rate is 39 percent.

AACSB: Analytical




2-54

31. Corporate Taxes Swimmy, Inc. had $400,000 in 2008 taxable income. Using the tax



A. $22,100, 5.525%, 34%

B. $113,900, 28.475%, 34%

C. $136,000, 34%, 34%

D. $136,000, 39%, 34%

From Table 2.3, the $400,000 of taxable income puts Swimmy in the 34 percent marginal tax

bracket. Thus,

Note that the base amount is the maximum dollar value listed in the previous tax bracket. The

average tax rate for Swimmy Inc. comes to:

If Swimmy earned $1 more of taxable income, it would pay 34 cents (its tax rate of 34

percent) more in taxes. Thus, the firm's marginal tax rate is 34 percent.


Difficulty: Basic



2-55

32. Corporate Taxes Scuba, Inc. is concerned about the taxes paid by the company in 2008.

In addition to $5 million of taxable income, the firm received $80,000 of interest on state-

issued bonds and $500,000 of dividends on common stock it owns in Boating Adventures,

Inc. What is Scuba's tax liability, average tax rate, and marginal tax rate, respectively?

A. $1,637,100, 31.788%, 34%

B. $1,751,000, 34%, 34%

C. $1,870,000, 34%, 34%

D. $1,983,900, 36.07%, 34%

In this case, interest on the state-issued bonds is not taxable and should not be included in

taxable income. Further, the first 70 percent of the dividends received from Boating

Adventures is not taxable. Thus, only 30 percent of the dividends received are taxed, so:

Taxable income = $5,000,000 + (.3)$500,000 = $5,150,000

Now Scuba's tax liability will be:

Tax liability = $113,900 + .34 ($5,150,000 - $335,000) = $1,751,000

The $500,000 of dividend income increased Scuba's tax liability by $51,000 (= (.3) x

$500,000 x (.34)). Scuba's resulting average tax rate is now:

Average tax rage = $1,751,000/$5,150,000 = 34.00%

Finally, if Scuba earned $1 more of taxable income, it would still pay 34 cents (based upon its

marginal tax rate of 34 percent) more in taxes.

AACSB: Analytical




2-56

33. Corporate Taxes Landscaping, Inc. is concerned about the taxes paid by the company in

2008. In addition to $250,000 of taxable income, the firm received $1,000 of interest on state-

issued bonds and $6,000 of dividends on common stock it owns in Sprinklers, Inc. What is

Landscaping's tax liability, average tax rate, and marginal tax rate, respectively?

A. $59,202, 23.51%, 39%

B. $81,452, 32.3479%, 39%

C. $83,480, 32.48%, 39%

D. $98,202, 39%, 39%

In this case, interest on the state-issued bonds is not taxable and should not be included in

taxable income. Further, the first 70 percent of the dividends received from Sprinklers is not

taxable. Thus, only 30 percent of the dividends received are taxed, so:

Taxable income = $250,000 + (.3)$6,000 = $251,800

Now Landscaping's tax liability will be:

Tax liability = $22,250 + .39 ($251,800 - $100,000) = $81,452

The $6,000 of dividend income increased Landscaping's tax liability by $702 (= (.3) x

$60,000 x (.39)). Landscaping's resulting average tax rate is now:

Average tax rage = $81,452/$251,800 = 32.3479%

Finally, if Landscaping earned $1 more of taxable income, it would still pay 39 cents (based

upon its marginal tax rate of 39 percent) more in taxes.

AACSB: Analytical




2-57

34. Statement of Cash Flows Paige's Properties Inc. reported 2008 net income of $5 million

and depreciation of $1,500,000. The top part Paige's Properties, Inc.'s 2007 and 2008 balance

sheets is listed below (in millions of dollars).

What is the 2008 net cash flow from operating activities for Paige's Properties, Inc.?

A. $-13,500,000

B. $1,500,000

C. $5,000,000

D. $6,500,000

AACSB: Analytical


Difficulty: Basic



2-58

35. Statement of Cash Flows Ann's Flowers Inc. reported 2008 net income of $1 million and

depreciation of $250,000. The top part Ann's Flowers, Inc.'s 2007 and 2008 balance sheets is

listed below (in millions of dollars).

What is the 2008 net cash flow from operating activities for Ann's Flower's, Inc.?

A. $-1,000,000

B. $1,000,000

C. $1,250,000

D. $2,250,000

AACSB: Analytical




2-59

36. Statement of Cash Flows In 2008, Upper Crust had cash flows from investing activities

of -$250,000 and cash flows from financing activities of -$150,000. The balance in the firm's

cash account was $90,000 at the beginning of 2008 and $105,000 at the end of the year. What

was Upper Crust's cash flow from operations for 2008?

A. $15,000

B. $105,000

C. $400,000

D. $415,000


Difficulty: Basic


37. Statement of Cash Flows In 2008, Lower Case Productions had cash flows from

investing activities of +$50,000 and cash flows from financing activities of +$100,000. The

balance in the firm's cash account was $80,000 at the beginning of 2008 and $65,000 at the

end of the year. What was Lower Case's cash flow from operations for 2008?

A. $-15,000

B. $-150,000

C. $-165,000

D. $65,000

AACSB: Analytical




2-60

38. Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to

evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned

an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense was $8 million.

Crew Cut's gross fixed assets increased by $10 million from 2007 to 2008. The firm's current

assets increased by $6 million and spontaneous current liabilities increased by $4 million.

What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for


A. $23, $10, $13

B. $23, $12, $11

C. $27, $10, $17

D. $27, $12, $15

Crew Cut's operating cash flow was:

Investment in operating capital for 2008 was:

Accordingly, Crew Cut's free cash flow for 2008 was:

In other words, in 2008, Crew Cut had cash flows of $15 million available to pay its

stockholders and debtholders.

AACSB: Analytical




2-61

39. Free Cash Flow You are considering an investment in Cruise, Inc. and want to evaluate

the firm's free cash flow. From the income statement, you see that Cruise earned an EBIT of

$202 million, paid taxes of $51 million, and its depreciation expense was $75 million.

Cruise's gross fixed assets increased by $70 million from 2007 to 2008. The firm's current

assets decreased by $10 million and spontaneous current liabilities increased by $6 million.

What is Cruise's operating cash flow, investment in operating capital and free cash flow for


A. $202, $70, $130

B. $226, $70, $156

C. $226, $54, $172

D. $226, $74, $152

Cruise's operating cash flow was:

Investment in operating capital for 2008 was:

Accordingly, Cruise's free cash flow for 2008 was:

In other words, in 2008, Cruise had cash flows of $172 million available to pay its

stockholders and debtholders.

AACSB: Analytical




2-62

40. Free Cash Flow Catering Corp. reported free cash flows for 2008 of $8 million and

investment in operating capital of $2 million. Catering listed $1 million in depreciation

expense and $2 million in taxes on its 2008 income statement. What was Catering's 2008

EBIT?

A. $7 million

B. $10 million

C. $11 million

D. $13 million

AACSB: Analytical




2-63

41. Free Cash Flow Iron Ore Corp. reported free cash flows for 2008 of $90 million and

investment in operating capital of $200 million. Iron Ore listed $50 million in depreciation

expense and $40 million in taxes on its 2008 income statement. What was Iron Ore's 2008

EBIT?

A. $140 million

B. $280 million

C. $290 million

D. $380 million

AACSB: Analytical




2-64

42. Statement of Retained Earnings TriCycle, Corp. began the year 2008 with $25 million

in retained earnings. The firm earned net income of $7 million in 2008 and paid $1 million to


2008 balance in retained earnings for TriCycle?

A. $25 million

B. $28 million

C. $32 million

D. $36 million

The statement of retained earnings for 2008 is as follows:

AACSB: Analytical




2-65

43. Statement of Retained Earnings Triplette, Corp. began the year 2008 with $-5 million in

retained earnings. The firm earned net income of $10 million in 2008 and paid $2 million to


2008 balance in retained earnings for Triplette?

A. $2 million

B. $5 million

C. $8 million

D. $18 million


AACSB: Analytical




2-66

44. Statement of Retained Earnings Night Scapes, Corp. began the year 2008 with $10

million in retained earnings. The firm suffered a net loss of $2 million in 2008 and yet paid $2

million to its preferred stockholders and $1 million to its common stockholders. What is the

year-end 2008 balance in retained earnings for Night Scapes?

A. $5 million

B. $8 million

C. $9 million

D. $15 million


AACSB: Analytical




2-67

45. Statement of Retained Earnings Z, Corp. began the year 2008 with $1 million in

retained earnings. The firm earned net income of $5 million in 2008 and paid $3 million to its

common stockholders. What is the year-end 2008 balance in retained earnings for Z?

A. $1 million

B. $3 million

C. $6 million

D. $9 million



Difficulty: Basic



2-68



A. $3 million

B. $4 million

C. $10 million

D. $17 million

Total Cash Dividends Paid = $56m. - $21m. - $52m. = -$17m. Thus, common stock dividends

paid = $17m. - $7m = $10m.

AACSB: Analytical




2-69



A. $20 million

B. $25 million

C. $70 million

D. $90 million

Total Cash Dividends Paid = $10m. - $60m. + $25m. = -$25m. Thus, common stock

dividends paid = $25m. - $5m = $20m.


Difficulty: Basic



2-70

48. Balance Sheet Harvey's Hamburger Stand has total assets of $3 million of which $1

million are current assets. Cash makes up 20 percent of the current assets and accounts

receivable makes up another 5 percent of current assets. Harvey's gross plant and equipment

has a book value of $1.5 million and other long-term assets have a book value of $1 million.

Using this information, what is the balance of inventory and the balance of depreciation on

Harvey's Hamburger Stand's balance sheet?

A. $250,000, $500,000

B. $250,000, $1 million

C. $750,000, $500,000

D. $750,000, $1 million





2-71

49. Balance Sheet Run4It has total assets of $20 million of which $10 million are current


another 50 percent of current assets. Run4It's gross plant and equipment has a book value of

$15 million and other long-term assets have a book value of $2 million. Using this


balance sheet?





AACSB: Analytical




2-72

50. Balance Sheet School Books, Inc. has total assets of $18 million of which $6 million are

current assets. Cash makes up 10 percent of the current assets and accounts receivable makes

up another 40 percent of current assets. School Book's gross plant and equipment has a book

value of $13 million and other long-term assets have a book value of $2 million. Using this


balance sheet?





AACSB: Analytical

Bloom's: Application & analysis Difficulty: Intermediate



2-73

51. Balance Sheet Universe It Ts has total assets of $250,000 of which $100,000 are current


another 65 percent of current assets. Ts's gross plant and equipment has a book value of

$200,000 and other long-term assets have a book value of $40,000. Using this information,

what is the balance of inventory and the balance of depreciation on Ts's balance sheet?

A. $20,000, $90,000

B. $20,000, $110,000

C. $100,000, $90,000

D. $100,000, $110,000

AACSB: Analytical




2-74

52. Balance Sheet Ted's Taco Shop has total assets of $5 million. Forty percent of these

assets are financed with debt of which $400,000 is current liabilities. The firm has no


information what is the balance for long-term debt and retained earnings on Ted's Taco Shop's

balance sheet?

A. $400,000, $1 million




AACSB: Analytical




2-75

53. Balance Sheet Purse's Galour has total assets of $2 million. Thirty percent of these assets

are financed with debt of which $200,000 is current liabilities. The firm has no preferred stock

but the balance in common stock and paid-in surplus is $800,000. Using this information what

is the balance for long-term debt and retained earnings on Galour's balance sheet?

A. $400,000, $600,000

B. $400,000, $800,000

C. $600,000, $600,000

D. $600,000, $800,000

AACSB: Analytical




2-76

54. Balance Sheet Hair Etc. has total assets of $15 million. Twenty percent of these assets are

financed with debt of which $1 million is current liabilities. The firm has no preferred stock

but the balance in common stock and paid-in surplus is $8 million. Using this information

what is the balance for long-term debt and retained earnings on Hair Etc's balance sheet?









2-77

55. Balance Sheet Storage N More has total assets of $25 million. Sixty percent of these

assets are financed with debt of which $5 million is current liabilities. The firm has no


information what is the balance for long-term debt and retained earnings on More's balance

sheet?





AACSB: Analytical




2-78

56. Market Value versus Book Value Acme Bricks balance sheet lists net fixed assets as

$40 million. The fixed assets could currently be sold for $50 million. Acme's current balance



paying $15 million in liabilities. What is the book value of Acme's assets today? What is the






Step 1. Net working capital (book value) = Current assets (book value) - Current liabilities

(book value)

= $12m. = Current assets (book value) - $15m. => Current assets (book value) = $12m. +

$15m. = $27m.

Step 2. Total assets (book value) = $27m. + $40m. = $67m.

Step 3. Net working capital (market value) = Current assets (market value) - Current liabilities

(market value)

= $77m. = Current assets (market value) - $15m. => Current assets (market value) = $77m. +

$15m. = $92m.

Step 4. Total assets (market value) = $92m. + $50m. = $142m.

AACSB: Analytical




2-79

57. Market Value versus Book Value Diva Nails balance sheet lists net fixed assets as $4

million. The fixed assets could currently be sold for $5 million. Diva's current balance sheet

shows current liabilities of $1 million and net working capital of $400,000. If all the current

accounts were liquidated today, the company would receive $5 million cash after paying $1

million in liabilities. What is the book value of Diva's assets today? What is the market value

of these assets?


B. $1.4 million, $5.4 million




(book value)

= $.4m. = Current assets (book value) - $1m. => Current assets (book value) = $.4m. + $1m.

= $1.4m.

Step 2. Total assets (book value) = $1.4m. + $4m. = $5.4m.


(market value)


$1m. = $6m.


AACSB: Analytical




2-80

58. Market Value versus Book Value Glo's Glasses balance sheet lists net fixed assets as

$20 million. The fixed assets could currently be sold for $25 million. Glo's current balance



paying $7 million in liabilities. What is the book value of Glo's assets today? What is the







(book value)

= $3 m. = Current assets (book value) - $7m. => Current assets (book value) = $3m. + $7m. =

$10m.



(market value)


$7m. = $16m.


AACSB: Analytical




2-81

59. Market Value versus Book Value Rupert's Rims balance sheet lists net fixed assets as

$15 million. The fixed assets could currently be sold for $17 million. Rupert's current balance



paying $5 million in liabilities. What is the book value of Rupert's assets today? What is the







(book value)

= $3 m. = Current assets (book value) - $5m. => Current assets (book value) = $3m. + $5m. =

$8m.



(market value)


$5m. = $11m.






2-82



identical operating income of $600,000. AllDebt, Inc. finances its $1.2 million in assets with

$1 million in debt (on which it pays 10 percent interest annually) and $.2 million in equity.

AllEquity, Inc. finances its $1.2 million in assets with no debt and $1.2 million in equity.

Both firms pay a tax rate of 30 percent on their taxable income. What are the asset funders'

(the debtholders and stockholders) resulting return on assets for the two firms?



C. 37.5%, and 37.5%, respectively


Return on assets funders' investment $.45m/$1.2m = 37.50%

$.42m/$1.2m = 35.00%

AACSB: Analytical




2-83










C. 33%, and 30%, respectively


Return on assets funders' investment $1.9m/$6m = 31.67%

$1.8m/$6m = 30.00%





2-84








A. 29.17%, and 35%,respectively




Return on assets funders' investment $6.75m/$18m = 37.5%

$6.3m/$18m = 35.00%

AACSB: Analytical




2-85



identical operating income of $400,000. AllDebt, Inc. finances its $800,000 in assets with

$600,000 in debt (on which it pays 5 percent interest annually) and $200,000 in equity.

AllEquity, Inc. finances its $800,000 in assets with no debt and $800,000 in equity. Both



A. 32.375%, and 35.00%,respectively

B. 36.125%, and 35.00%, respectively



Return on assets funders' investment $.289m/$.8m = 36.125%

$.28m/$.8m = 35.00%

AACSB: Analytical




2-86

64. Income Statement You have been given the following information for Fina's Furniture

Corp.:

net sales = $25,500,000





The firm's tax rate is 30 percent. What is the depreciation expense for Fina's Furniture Corp?

A. $12,100,000

B. $12,400,000

C. $14,100,000

D. $14,400,000

Step 1. Net income = Common and preferred stock dividends + Addition to retained earnings

=

$500,000 + $305,000 = $805,000

Step 2. EBT (1 - tax rate) = Net income => EBT = Net income/(1 - tax rate) = $805,000/(1-.3)

= $1,150,000

Step 3. EBIT - Interest = EBT => EBIT = EBT + Interest = $1,150,000 + $2,000,000 =

$3,150,000

Step 4. Gross profits = Net sales - Cost of goods sold = $25,500,000 - 10,250,000 =

$15,250,000

Step 5. Gross profits - Depreciation = EBIT => Depreciation = Gross profits - EBIT =

$15,250,000 - $3,150,000 = $12,100,000





2-87

65. Income Statement You have been given the following information for Romeo's Rockers

Corp.:

net sales = $5,200,000





The firm's tax rate is 30 percent. What is the depreciation expense for Romeo's Rockers

Corp?

A. $900,000

B. $1,100,000

C. $1,500,000

D. $1,600,000


=

$400,000 + $1,000,000 = $1,400,000

Step 2. EBT (1 - tax rate) = Net income => EBT = Net income/(1 - tax rate) = $1,400,000/(1-

.3) = $2,000,000

Step 3. EBIT - Interest = EBT => EBIT = EBT + Interest = $2,000,000 + $200,000 =

$2,200,000

Step 4. Gross profits = Net sales - Cost of goods sold = $5,200,000 - 2,100,000 = $3,100,000


$3,100,000 - $2,200,000 = $900,000




2-88

66. Income Statement You have been given the following information for Paige's Purses

Corp.:

net sales = $10,750,000





The firm's tax rate is 40 percent. What is the depreciation expense for Paige's Purses Corp?

A. $950,000

B. $1,200,000

C. $1,450,000

D. $3,220,000


=

$2,000,000 + $1,030,000 = $3,030,000

Step 2. EBT (1 - tax rate) = Net income => EBT = Net income/(1 - tax rate) = $3,030,000/(1-

.4) = $5,050,000

Step 3. EBIT - Interest = EBT => EBIT = EBT + Interest = $5,050,000 + $250,000 =

$5,300,000



$6,500,000 - $5,300,000 = $1,200,000




2-89

67. Income Statement You have been given the following information for Nicole's Neckties

Corp.:

net sales = $2,500,000





The firm's tax rate is 40 percent. What is the depreciation expense for Nicole's Neckties

Corp?

A. $550,000

B. $600,000

C. $650,000

D. $820,000


=

$300,000 + $30,000 = $330,000


= $550,000

Step 3. EBIT - Interest = EBT => EBIT = EBT + Interest = $550,000 + $50,000 = $600,000



$1,200,000 - $600,000 = $600,000




2-90

68. Income Statement You have been given the following information for Sherry's Sandwich

Corp.:

net sales = $300,000;






Sherry's Sandwich Corp?






=

$8,500 + $30,000 = $38,500


= $55,000

Step 3. Gross profits = Net sales - Cost of goods sold =>Net Sales - Gross Profit = Cost of

Goods Sold $300,000 - 100,000 = $200,000

Step 4. Gross profits - Depreciation = EBIT = $100,000 - $25,000 = $75,000

Step 3. EBIT - Interest = EBT => Interest = EBIT - EBT = $75,000 + $55,000 = $20,000

AACSB: Analytical




2-91

69. Income Statement You have been given the following information for Kaye's Krumpet

Corp.:

net sales = $150,000;






Kaye's Krumpet Corp?






=

$8,000 + $20,000 = $28,000


= $40,000


Goods Sold $150,000 - 50,000 = $50,000






2-92

70. Income Statement You have been given the following information for Amy's Armchairs

Corp.:

net sales = $1,500,000;

gross profit = $1,000,000;





Amy's Armchair Corp?






=

$90,000 + $300,000 = $390,000


= $650,000


Goods Sold $1,500,000 - 500,000 = $1,000,000

Step 4. Gross profits - Depreciation = EBIT = $1,000,000 - $250,000 = $750,000


AACSB: Analytical




2-93

71. Income Statement You have been given the following information for Ross's Rocket

Corp.:

net sales = $1,000,000;






Ross's Rocket Corp?






=

$90,000 + $60,000 = $150,000


= $250,000


Goods Sold $1,000,000 - 400,000 = $600,000



AACSB: Analytical




2-94

72. Corporate Taxes The Carolina Corporation had a 2008 taxable income of $3,000,000

from operations after all operating costs but before




4) income taxes.

Using the tax schedule in Table 2.3, what is Carolina's income tax liability?

What are Carolina's average and marginal tax rates on taxable income from operations?

A. $857,650, 28.5883%, 34%, respectively

B. $875,500, 29.1833%, 34%, respectively

C. $875,500, 34%, 34%, respectively

D. $1,020,000, 34%, 34%, respectively

The first 70 percent of the dividends received by Carolina Corp. is not taxable. Thus, only 30

percent of the dividends received are taxed, so:

Taxable income = $3,000,000 - $500,000 + (.3)$75,000 = $2,522,500

Now Carolina's Corp.'s tax liability will be:

Tax liability = $113,900 + .34 ($2,522,500 - $335,000) = $857,650

Carolina Corp.'s resulting average tax rate is now:

Average tax rage = $857650/$3,000,000 = 28.5883%

Finally, if Carolina Corp earned $1 more of taxable income, it would still pay 34 cents (based


AACSB: Analytical




2-95

73. Corporate Taxes The Ohio Corporation had a 2008 taxable income of $50,000,000 from





4) income taxes.

Using the tax schedule in Table 2.3, what is Ohio's income tax liability?

What are Ohio's average and marginal tax rates on taxable income from operations?

A. $6,416,667, 12.8333%, 35%, respectively

B. $13,829,725.45, 27.6595%, 35%, respectively

C. $17,329,725.45, 34.6595%, 35%, respectively

D. $17,340,750.45, 34.6815%, 35%, respectively

The first 70 percent of the dividends received by Ohio Corp. is not taxable. Thus, only 30


Taxable income = $50,000,000 - $500,000 + (.3)$45,000 = $49,513,500

Now Ohio's Corp.'s tax liability will be:

Tax liability = $6,416,667 + .35 ($49,513,500 - $18,333,333) = $17,329,725.45

Ohio Corp.'s resulting average tax rate is now:

Average tax rage = $17,329,725.45/$50,000,000 = 34.6595%

Finally, if Ohio Corp earned $1 more of taxable income, it would still pay 35 cents (based


AACSB: Analytical




2-96

74. Corporate Taxes The Sasnak Corporation had a 2008 taxable income of $4,450,000 from





4) income taxes.

Using the tax schedule in Table 2.3, what is Sasnak's income tax liability?

What are Sasnak's average and marginal tax rates on taxable income from operations?

A. $1,349,800, 30,3326%, 34%, respectively

B. $1,349,800, 34%, 34%, respectively

C. $1,564,000, 34%, 34%, respectively

D. $1,564,000, 35,1461%, 34%, respectively

The first 70 percent of the dividends received by Sasnak Corp. is not taxable. Thus, only 30


Taxable income = $4,450,000 - $750,000 + (.3)$900,000 = $3,970,000

Now Sasnak's Corp.'s tax liability will be:

Tax liability = $113,900 + .34 ($3,970,000- $335,000) = $1,349,800

Sasnak Corp.'s resulting average tax rate is now:

Average tax rage = $1,349,800/$4,450,000 = 30.3326%

Finally, if Sasnak Corp earned $1 more of taxable income, it would still pay 34 cents (based


AACSB: Analytical




2-97

75. Corporate Taxes The AOK Corporation had a 2008 taxable income of $2,200,000 from





4) income taxes.

Using the tax schedule in Table 2.3, what is AOK's income tax liability?

What are AOK's average and marginal tax rates on taxable income from operations?

A. $793,900, 34%, 34%, respectively

B. $793,900, 36.0864%, 34%, respectively

C. $972,400, 34%, 34%, respectively

D. $972,400, 44.2%, 34%, respectively

The first 70 percent of the dividends received by AOK Corp. is not taxable. Thus, only 30


Taxable income = $2,200,000 - $90,000 + (.3)$750,000 = $2,335,000

Now AOK's Corp.'s tax liability will be:

Tax liability = $113,900 + .34 ($2,335,000- $335,000) = $793,900

AOK Corp.'s resulting average tax rate is now:

Average tax rage = $793,900/$2,200,000 = 36.0864%

Finally, if AOK Corp earned $1 more of taxable income, it would still pay 34 cents (based


AACSB: Analytical




2-98

76. Corporate Taxes Suppose that in addition to the $5.5 million of taxable income from

operations, Emily's Flowers, Inc. received $500,000 of interest on state-issued bonds and

$300,000 of dividends on common stock it owns in Amy's Iris Bulbs, Inc.

Using the tax schedule in Table 2.3 what is Emily's Flowers' income tax liability.

What are Emily's Flowers' average and marginal tax rates on total taxable income?

A. $1,900,600, 34%, 34%, respectively

B. $1,972,000, 34%, 34%, respectively

C. $2,070,600, 34%, 34%, respectively

D. $2,142,000, 34%, 34%, respectively

Interest on the state-issued bonds is not taxable and should not be included in taxable income.

Further, the first 70 percent of the dividends received from Amy's is not taxable. Thus, only

30 percent of the dividends received are taxed, so:

Taxable income = $5,500,000 + (.3)$300,000 = $5,590,000

Now Emily's tax liability will be:

Tax liability = $113,900 + .34 ($5,590,000 - $335,000) = $1,900,600

Emily's resulting average tax rate is now:

Average tax rage = $1,900,600/$5,590,000= 34%

Finally, if Emily earned $1 more of taxable income, it would still pay 34 cents (based upon its


AACSB: Analytical




2-99

77. Corporate Taxes Suppose that in addition to the $10 million of taxable income from

operations, Jack's Hills, Inc. received $200,000 of interest on state-issued bonds and $600,000

of dividends on common stock it owns in Jill's Pales, Inc.

Using the tax schedule in Table 2.3 what is Jack's income tax liability.

What are Jack's average and marginal tax rates on total taxable income?

A. $3,400,000, 35%, 35%, respectively

B. $3,463,000, 34.0177%, 35%, respectively

C. $3,563,000, 35%, 35%, respectively

D. $3,680,000, 34.0741%, 35%, respectively


Further, the first 70 percent of the dividends received from Jill's is not taxable. Thus, only 30


Taxable income = $10,000,000 + (.3)$600,000 = $10,180,000

Now Jack's tax liability will be:

Tax liability = $3,400,000+ .35 ($10,180,000 - $10,000,000) = $3,463,000

Jack's resulting average tax rate is now:

Average tax rage = $3,463,000/$10,180,000= 34.0177%

Finally, if Jack earned $1 more of taxable income, it would still pay 35 cents (based upon its


AACSB: Analytical




2-100


operations, Liam's Burgers, Inc. received $25,000 of interest on state-issued bonds and

$50,000 of dividends on common stock it owns in Sodas, Inc.

Using the tax schedule in Table 2.3 what is Liam's income tax liability.

What are Liam's average and marginal tax rates on total taxable income?

A. $106,100, 33.6825%, 39%, respectively

B. $122,850, 39%, 39%, respectively

C. $129,500, 34.5333%, 39%, respectively

D. $139,250, 37.1333%, 359%, respectively


Further, the first 70 percent of the dividends received from Soda's is not taxable. Thus, only

30 percent of the dividends received are taxed, so:

Taxable income = $300,000 + (.3)$50,000 = $315,000

Now Liam's tax liability will be:

Tax liability = $22,250 + .39 ($315,000 - $100,000) = $106,100

Liam's resulting average tax rate is now:

Average tax rage = $106,100/$315,000= 33.6825%

Finally, if Liam earned $1 more of taxable income, it would still pay 39 cents (based upon its


AACSB: Analytical




2-101


operations, Tan Lines, Inc. received $7,000 of interest on state-issued bonds and $30,000 of

dividends on common stock it owns in Sun Lotions, Inc.

Using the tax schedule in Table 2.3 what is Tan Lines' income tax liability.

What are Tan Lines' average and marginal tax rates on total taxable income?

A. $80,750, 32.3%, 39%, respectively

B. $84,260, 32.5328%, 39%, respectively

C. $95,180, 33.1638%, 39%, respectively

D. $105,260, 37.5929%, 359%, respectively


Further, the first 70 percent of the dividends received from Sun Lotions is not taxable. Thus,

only 30 percent of the dividends received are taxed, so:

Taxable income = $250,000 + (.3)$30,000 = $259,000

Now Liam's tax liability will be:

Tax liability = $22,250 + .39 ($259,000 - $100,000) = $84,260

Tan Lines' resulting average tax rate is now:

Average tax rage = $84,260/$259,000= 32.5328%

Finally, if Tan Lines earned $1 more of taxable income, it would still pay 39 cents (based


AACSB: Analytical




2-102

80. Statement of Cash Flows Fina's Faucets, Inc. has net cash flows from operating activities

for the last year of $17 million. The income statement shows that net income is $15 million

and depreciation expense is $6 million. During the year, the change in inventory on the

balance sheet was an increase of $4 million, change in accrued wages and taxes was an

increase of $1 million and change in accounts payable was an increase of $1 million. At the



A. $2 million

B. $3 million

C. $7 million

D. $9 million

Thus, end of year balance of accounts receivable = $5m. + $2m. = $7m.

AACSB: Analytical




2-103

81. Statement of Cash Flows Zoe's Dog Biscuits, Inc. has net cash flows from operating



inventory on the balance sheet was an increase of $14 million, change in accrued wages and

taxes was an increase of $15 million and change in accounts payable was an increase of $10



A. $20 million

B. $25 million

C. $45 million

D. $65 million

Thus, end of year balance of accounts receivable = $45m. + $20m. = $65m.

AACSB: Analytical




2-104

82. Statement of Cash Flows Cloe's Costumes, Inc. has net cash flows from operating



inventory on the balance sheet was a decrease of $14 million, change in accrued wages and

taxes was a decrease of $15 million and change in accounts payable was a decrease of $10



A. $20 million

B. $25 million

C. $45 million

D. $65 million

Thus, end of year balance of accounts receivable = $45m. - $20m. = $25m.





2-105

83. Statement of Cash Flows Nickolas's Nut Farms, Inc. has net cash flows from operating

activities for the last year of $25 million. The income statement shows that net income is $15

million and depreciation expense is $6 million. During the year, the change in inventory on

the balance sheet was a decrease of $4 million, change in accrued wages and taxes was a

decrease of $1 million and change in accounts payable was a decrease of $1 million. At the



A. $2 million

B. $3 million

C. $7 million

D. $9 million

Thus, end of year balance of accounts receivable = $5m. - $2m. = $3m.

AACSB: Analytical




2-106

84. Statement of Cash Flows Crispy Corporation has net cash flow from financing activities


the year, the change in notes payable on the balance sheet was an increase of $2 million, and



debt?

A. $15 million

B. $20 million

C. $25 million

D. $35 million

Thus, beginning of year balance for long-term debt = $45 - $20m = $25m.

AACSB: Analytical




2-107

85. Statement of Cash Flows Full Moon Productions Inc. has net cash flow from financing

activities for the last year of $105 million. The company paid $15 million in dividends last

year. During the year, the change in notes payable on the balance sheet was an increase of $40

million, and change in common and preferred stock was an increase of $50 million. The end

of year balance for long-term debt was $50 million. What was their beginning of year balance

for long-term debt?

A. $5 million

B. $20 million

C. $30 million

D. $35 million


AACSB: Analytical




2-108

86. Statement of Cash Flows Crax Corporation has net cash flow from financing activities





debt?

A. $16 million

B. $20 million

C. $21 million

D. $45 million


AACSB: Analytical




2-109

87. Statement of Cash Flows Café Creations Inc. has net cash flow from financing activities



change in common and preferred stock was an increase of $50 million. The end of year

balance for long-term debt was $40 million. What was their beginning of year balance for

long-term debt?

A. $10 million

B. $20 million

C. $30 million

D. $40 million


AACSB: Analytical




2-110

88. Free Cash Flow The 2008 income statement for Pete's Pumpkins shows that depreciation


percent. At the beginning of the year, the balance of gross fixed assets was $1,600 million and


$2,000 million. Pete's free cash flow for the year was $630 million. What is their end of year


A. $24 million

B. $264 million

C. $654 million

D. $1,064 million

Taxes = $320m. x (.3) = $96m. =>

Pete's operating cash flow was:

OCF = EBIT - Taxes + Depreciation

= ($500m. - $96m. + $250m.) = $654m.

Pete's free cash flow for 2008 was:

FCF = Operating cash flow - Investment in operating capital

$630m. = $654m. - Investment in operating capital

=> Investment in operating capital = $654m. - $630m. =$24m.

Accordingly, investment in operating capital for 2008 was:

IOC = Gross fixed assets + Net operating working capital

$24m. = ($2,000m. - $1,600m.) + (Ending net operating working capital - $640m.)

=> Ending net operating working capital = $24m. - ($2,000m. - $1,600m.) + $640 m. =

$264m.

AACSB: Analytical




2-111

89. Free Cash Flow The 2008 income statement for Lou's Shoes shows that depreciation

expense is $2 million, EBIT is $5 million, EBT is $3 million, and the tax rate is 40 percent. At

the beginning of the year, the balance of gross fixed assets was $16 million and net operating

working capital was $6 million. At the end of the year gross fixed assets was $20 million.

Lou's free cash flow for the year was $4 million. What is their end of year balance for net

operating working capital?

A. $1.8 million

B. $3.8 million

C. $5.8 million

D. $12.2 million

Taxes = $3m. x (.4) = $1.2m. =>

Lou's operating cash flow was:


= ($5m. - $1.2m. + $2m.) = $5.8m.

Lou's free cash flow for 2008 was:


$4m. = $5.8m. - Investment in operating capital

=> Investment in operating capital = $5.8m.- $4m. = $1.8m.



$1.8m. = ($20m. - $16m.) + (Ending net operating working capital - $6m.)

=> Ending net operating working capital = $1.8m. - ($20m. - $16m.) + $6m. = $3.8m.

AACSB: Analytical




2-112

90. Free Cash Flow The 2008 income statement for Paige's Purses shows that depreciation


percent. At the beginning of the year, the balance of gross fixed assets was $80 million and


$100 million. Paige's free cash flow for the year was $20 million. What is their end of year


A. $10.5 million

B. $14 million

C. $20.5 million

D. $30.5 million

Taxes = $15m. x (.3) = $4.5m. =>

Paige's operating cash flow was:


= ($25m. - $4.5m. + $10m.) = $30.5m.

Paige's free cash flow for 2008 was:


$40m. = $30.5m. - Investment in operating capital

=> Investment in operating capital = $30.5m. - $20m. =$10.5m.



$10.5m. = ($100m. - $80m.) + (Ending net operating working capital - $30m.)

=> Ending net operating working capital = $10.5m. - ($100m. - $80m.) + 30m. = $20.5m.

AACSB: Analytical




2-113

91. Free Cash Flow The 2008 income statement for Louis Lumberyard shows that

depreciation expense is $500 million, EBIT is $1,000 million, EBT is $600 million, and the

tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was

$2,000 million and net operating working capital was $1,500 million. At the end of the year

gross fixed assets was $4,000 million. Louis's free cash flow for the year was $1,240 million.

What is their end of year balance for net operating working capital?

A. $-420 million

B. $80 million

C. $420 million

D. $1,320 million

Taxes = $600m. x (.3) = $180m. =>

Louis's operating cash flow was:


= ($1,000m. - $180m. + $500m.) = $1,320m.

Louis's free cash flow for 2008 was:


$1,240m. = $1,320m. - Investment in operating capital

=> Investment in operating capital = $1,320m. - $1,240m. =$80m.



$80m. = ($4,000m. - $2,000m.) + (Ending net operating working capital - $1,500m.)

=> Ending net operating working capital = $80m. - ($4,000m. - $2,000m.) + 1,500m. = $-

420m.

AACSB: Analytical




2-114

92. Free Cash Flow The 2008 income statement for Betty's Barstools shows that depreciation

expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the

year, the balance of gross fixed assets was $510 million. The change in net operating working

capital during the year was $94 million. Betty's free cash flow for the year was $625 million.


A. $359 million

B. $380 million

C. $849 million

D. $1,094 million

Betty's operating cash flow was:


= ($400m. - $120m + $100m) = $380m.

Betty's free cash flow for 2008 was:



= > Investment in operating capital = $380m. - $625m. = $-245m.



$-245m. = ($510m. - Beginning of year gross fixed assets) + $94m.

=> Beginning of year gross fixed assets = 510m. - ($-245m). +$94m. = $849m.

AACSB: Analytical




2-115

93. Free Cash Flow The 2008 income statement for John's Gym shows that depreciation

expense is $20 million, EBIT is $80 million, and taxes are $24 million. At the end of the year,

the balance of gross fixed assets was $102 million. The change in net operating working

capital during the year was $18 million. John's free cash flow for the year was $41 million.


A. $43 million

B. $77 million

C. $84 million

D. $163 million

John's operating cash flow was:


= ($80m. - $24m + $20m) = $84m.

John's free cash flow for 2008 was:



= > Investment in operating capital = $84m. - $41m. = $43m.



$43m. = ($102m. - Beginning of year gross fixed assets) + $18m.

=> Beginning of year gross fixed assets = 102m. - $43m +$18m. = $77m.

AACSB: Analytical




2-116

94. Statement of Retained Earnings Bike and Hike, Inc. started the year with a balance of

retained earnings of $100 million and ended the year with retained earnings of $128 million.

The company paid dividends of $9 million to the preferred stock holders and $22 million to

common stock holders. What was Bike and Hike's net income for the year?

A. $28 million

B. $31 million

C. $59 million

D. $128 million





2-117

95. Statement of Retained Earnings Soccer Starz, Inc. started the year with a balance of

retained earnings of $25 million and ended the year with retained earnings of $32 million. The

company paid dividends of $2 million to the preferred stock holders and $6 million to

common stock holders. What was Soccer Starz's net income for the year?

A. $7 million

B. $15 million

C. $40 million

D. $49 million

AACSB: Analytical




2-118

96. Statement of Retained Earnings Jamaican Ice Cream Corp. started the year with a

balance of retained earnings of $100 million. The company reported net income for the year

of $45 million, paid dividends of $2 million to the preferred stock holders and $15 million to

common stock holders. What is Jamaican Ice Cream's end of year balance in retained

earnings?

A. $38 million

B. $55 million

C. $128 million

D. $162 million

AACSB: Analytical




2-119

97. Statement of Retained Earnings Water Adventures Corp. started the year with a balance

of retained earnings of $50 million. The company reported net income for the year of $12

million, paid dividends of $1 million to the preferred stock holders and $30 million to

common stock holders. What is Water Adventure's end of year balance in retained earnings?

A. $19 million

B. $31 million

C. $43 million

D. $62 million

AACSB: Analytical




2-120

98. Income Statement Listed below is the 2008 income statement for Lamps, Inc.

The CEO of Lamp's wants the company to earn a net income of $12 million in 2009. Cost of

goods sold is expected to be 75 percent of net sales, depreciation expense is not expected to

change, interest expense is expected to increase to $4 million, and the firms tax rate will be 40

percent. What is the net sales needed to produce net income of $12 million?

A. $29 million

B. $112 million

C. $116 million

D. $124 million


2-121

Step 1. EBT (1-t) = Net income = $12m = EBT (1-.4) => EBT = $12m./(1-.4) = $20m.

Step 2. EBIT = EBT + Interest = $20m. + $4m. = $24m.

Step 3. Gross profits = EBIT + Depreciation = $24m. + $5m. = $29m

Step 4. Net sales = Gross profits/(1-Cost of goods sold percent) = $29m./(1. - .75) = $116m.

Step 5. Cost of goods sold = Sales - Gross profits = $116m. - $29 = $87m.

AACSB: Analytical

Bloom's: Application & analysis Difficulty: Advanced



2-122

99. Income Statement You have been given the following information for Halle's Holiday

Store Corp. for the year 2008:

net sales = $50,000,000;





The firm's tax rate is 30 percent.

In 2009, net sales are expected to increase by $5.5 million,

cost of goods sold is expected to be 65 percent of net sales,

expensed depreciation is expected to be the same as in 2008,

interest expense is expected to be $2,500,000,

the tax rate is expected to be 30 percent of EBT, and dividends paid to preferred and common

stockholders will not change.

What is the addition to retained earnings expected in 2009?

A. $2,000,000

B. $5,447,500

C. $8,447,500

D. $10,304,643


2-123

AACSB: Analytical


Difficulty: Advanced Learning Objective: 1


2-124

100. Free Cash Flow Martha's Moving Van 4U, Inc. had free cash flow during 2008 of $1

million, EBIT of $30 million, tax expense of $8 million, and depreciation of $4 million. Using

this information, what was Martha's Accounts Payable ending balance in 2008?

A. $5 million

B. $15 million

C. $35 million

D. $45 million


2-125

Martha's operating cash flow for 2008 was:

OCF = EBIT - Taxes + Depreciation = ($30m. - $8m. + $4m.) = $26m.

Martha 's free cash flow was:



So, Investment in operating capital = $26m. - $1m. = $25m.


$25m. = ($40m. - $30m.) + Net operating working capital

=> Net operating working capital = $25m. - ($40m. - $30m.) = $15m.

Net operating working capital = $15m. = ∆Current assets - ∆Current liabilities

$15m. = ($130m. - $110m.) - ∆Current liabilities

=> ∆Current liabilities = ($130m. - $110m.) - $15m. = $5m.

=> 2008 Current liabilities = $85m. + $5m. = $90m.

and 2008 Current liabilities = Accrued wages and taxes + Accounts payable + Notes payable

$90m. = $20m. + Accounts payable + $35m.

=> Accounts payable = $908m. - $20m. - $35m. = $35m.


2-126

AACSB: Analytical




2-127

101. Free Cash Flow Windy City Designs had free cash flow during 2008 of $1 million. The

change in gross fixed assets on Windy's balance sheet during 2008 was $25 million and the

change in net operating working capital was $37 million. Using this information, what will

Windy's taxes be?

A. $20 million

B. $25 million

C. $32 million

D. $36 million


=> IOC = $25m. + $37m. = $62m.


=> $1m. = Operating cash flow - $62m.

=> Investment in operating capital = $62m. + $1m. = $60m.


Using the numbers below: $60m. = $60m. - Taxes + $20m

=> Taxes = $60m. + $20m. - $60m. = $20m.


Difficulty: Advanced


Essay Questions


2-128

102. LG 5 2-21 Statement of Cash Flows Use the balance sheet and income statement below

to construct a statement of cash flows for Betty's Bakery Corp.


2-129


2-130

AACSB: Analytical




2-131

103. Statement of Cash Flows Use the balance sheet and income statement below to

construct a statement of cash flows for Val's Vegetable Corp.


2-132


2-133

AACSB: Analytical

Bloom's: Application & analysis Difficulty: Advanced



2-134

104. When might earnings management become an ethical consideration?

Per authors' end of chapter questions:

Managers and financial analysts have recognized for years that firms use considerable latitude

in using accounting rules to manage their reported earnings in a wide variety of contexts.

Indeed, within the GAAP framework, firms can "smooth" earnings. That is, firms often take

steps to over or understate earnings at various times. Managers may choose to smooth

earnings to show investors that firm assets are growing steadily. Similarly, one firm may be

using straight line depreciation for its fixed assets, while another is using a modified

accelerated cost recovery method (MACRS), which causes depreciation to accrue quickly. If

the firm uses MACRS accounting methods, they write fixed asset values down quickly; assets

will thus have lower book value than if the firm used straight line depreciation methods. This

process of controlling a firm's earnings is called earnings management.

Ethical considerations:

Earnings management could become an ethical issue if managers started applying GAAP

inconsistently throughout accounting periods in order to ‘manage' the financial reports given

to outsiders and/or insiders. One example could be the smoothing mentioned above.

AACSB: Ethics

Bloom's: Synthesis and evaluation Difficulty: Intermediate


105. How do taxes influence how corporate managers' and investors' structure transactions

and capitalize their companies?

Many firms pay out much of their earnings in taxes. The focus on this chapter has been

income taxes, but there are other taxes that a company must pay, too. Many companies will

look for transactions with tax advantages. One such example would be to finance their

company with debt versus equity. Interest payments are deductible from income taxes; where

as, dividend payments are not.


Bloom's: Synthesis and evaluation



2-135

106. How would you explain to a friend why market value of a firm is more important to an

investor than book value of the firm?

What assets can be sold (market value) for might differ than the historical costs that are

reflected on the balance sheet. What the equity can be sold for (market value or price per

share) might differ from the balances reflected in the stockholder equity section of the balance

sheet. Financial managers and investors are often more concerned with the value of physical

and financial assets in the market place and find those numbers more relevant than what is

reported on the balance sheet.


Bloom's: Knowledge and understanding Difficulty: Intermediate


Documents

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